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This article focuses on the analysis of consumer demand in markets for vertically differentiated products—markets where quality is the main differentiating attribute of the goods involved. The objective is to provide an overview of the analysis of consumer demand in vertically differentiated markets, the standard assumptions employed in the literature, and the relevance and ramifications of some key assumptions for the analysis of food product markets. The article presents a general model of vertical product differentiation and derives the consumer demands for, and market shares of, the...

This article focuses on the analysis of consumer demand in markets for vertically differentiated products—markets where quality is the main differentiating attribute of the goods involved. The objective is to provide an overview of the analysis of consumer demand in vertically differentiated markets, the standard assumptions employed in the literature, and the relevance and ramifications of some key assumptions for the analysis of food product markets. The article presents a general model of vertical product differentiation and derives the consumer demands for, and market shares of, the different products, as well as measures of consumer surplus for the different consumer groups involved. The discussion then focuses on alternative model formulations derived through different assumptions employed in the analysis. The assumptions employed can have important ramifications for the equilibrium variety and the structure of different supply channels. Finally, this article discusses some important issues that can be addressed using this methodological framework.